NASSCOM-EVEREST

INDIA BPO STUDY

Roadmap 2012 - Capitalizing on
the Expanding BPO Landscape

Executive Summary
India is at the forefront of the rapidly evolving Business Process Offshoring (BPO1) market and is well
established as a destination of choice. Having grown manifold in size and matured in terms of service
delivery capability and footprint over the past decade, the Indian BPO industry is now at an inflexion
point and faces a unique opportunity to enhance its role as a full-service, value-adding partner. There
is significant headroom in the addressable BPO opportunity for buyers2 and providers, and there are
sizeable untapped opportunities across a wide spectrum of segments. Also, Indian BPO industry is
favourably positioned to benefit from its established delivery capabilities, which bear a key
influence on buyers decision to expand their global sourcing exposure. Over the next five years, the right
choices by stakeholders of the Indian BPO industry could effect a fivefold growth. The aspired target is
aggressive, but it is achievable, and will bring huge payoffs to Indias economy, employment and role in
the global marketplace.
This study is a comprehensive fact-based view of capabilities, opportunities, and growth imperatives
for the Indian BPO industry that will allow for focussed decision-making by all stakeholders providers
(third-party vendors and captives), buyers, NASSCOM and the Government.

Evolution to date
Growing at more than 35 percent over the past three years, BPO is the fastest growing segment of the
overall offshore market3, and is currently estimated at US$ 26-29 billion. While labour arbitrage has
been a key driver for this growth, other factors such as access to talent, service quality, productivity, and
time-to-market have gained importance.
The Indian BPO industrys growth and increasing maturity is reflected across multiple dimensions. In
just over a decade, the industry has grown to reach nearly US$ 11 billion4 in export revenues, employs
more than 700,000 people, and accounts for more than 35 percent of the worldwide BPO market. This
growth has been driven by 1) accelerated adoption by buyers of different sizes, from across industry
verticals and geographies, and 2) rapidly evolving supply-side maturity across service segments. This is
reflected in widening service portfolio, increased scope of services, greater penetration across vertical
and geographic markets served, evolution of business and engagement models, and development of
global delivery capabilities by the Indian BPO industry.
Most horizontal BPO5 segments (e.g., Customer Interaction and Support6, Finance & Accounting,
Human Resources, Procurement Services, and Knowledge Services) have matured significantly and
account for more than 70 percent of the Indian BPO industry. While Customer Interaction & Support
Throughout this report, BPO stands for Business Process Offshoring
Including customers using third-party vendors and parent organizations of offshore captive entities
Overall offshore market (including ITO and BPO) is estimated at US$ 70-76 billion in 2007
4
FY2008(E) export revenues - US$ 10.9 billion
5
Refers to BPO offerings that are reasonably similar across verticals
6
Refers to the set of services relating to customer relationship management (CRM) including general query handling, service support, and sales and marketing services
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(CIS) and Finance & Accounting (F&A) have been the dominant horizontal market segments, other
service segments like Knowledge Services are increasingly becoming important and continue to drive
market maturity. Many horizontal services are now demanded and offered across verticals Everests
full-service index for the aggregate industry shows providers offer CIS, F&A and Knowledge Services
across multiple verticals. In addition, both buyers and providers increasingly cover end-to-end services
within each horizontal.
Another dimension of increased maturity of the industry is reflected in the growing importance
of vertical-specific processes7. More than 25 percent of the Indian BPO market today consists of
delivering functions and processes that are specific to a particular industry or vertical. In response
to evolving buyer needs, providers have expanded their service footprint into core vertical-specific
processes and are developing vertical specialization to increase breadth and depth of service delivery.
As an example, our analysis shows that more than 50 percent of providers servicing Banking, Capital
Markets and Insurance verticals have developed credible vertical specialization.
Further, the buyer (i.e. customer) profile of the industry shows increased diversification in terms of
geography and size. Buyers from the UK, Continental Europe and Asia Pacific are increasingly offshoring
delivery of business processes to India. Similarly, there is increased awareness and adoption amongst
mid-sized and small buyers. In addition, the domestic Business Process Outsourcing market8 has also
grown rapidly and is expected to reach about US$ 1.6 billion by FY2008.
The provider landscape has also witnessed significant changes. In addition to establishing
captive BPO centers, buyers now have a substantially large choice of third-party vendors to engage. In
addition, several hybrid sourcing models like build-operate-transfer and virtual captives are also being
used. The market is witnessing increased merger and acquisition (M&A) activity, as providers are looking
to build scale and acquire new capabilities rapidly, particularly to increase geographic reach and acquire key
service segment capabilities. Efforts are also underway to deliver value beyond cost savings and
sustain high growth levels through increased use of tools and technologies, adoption of standards and
best practices, and leveraging a global delivery model. The delivery footprint of the Indian BPO industry
now extends to over 75 cities across 25 countries outside India. Within India, the delivery footprint of the
BPO industry now extends to more than 30 cities across the country, and covers many Tier- 2/3 cities.

Future market opportunity

The achievements to date of Indian BPO industry are impressive. However, there is significant
headroom to tap the addressable market opportunity from exports and from serving the domestic
market. A bottom-up analysis shows a total export BPO market opportunity of US$ 220-280 billion
by 2012. The domestic Business Process Outsourcing market provides an additional US$ 15-20 billion
opportunity for the industry by 2012.

7
8

Refers to BPO services that require a high degree of vertical-specific knowledge

Business Process Outsourcing within India

NASSCOM-EVEREST INDIA BPO STUDY

The addressable market opportunity for Indian BPO industry shows that traditional areas of focus will
continue to be large, but several other areas also have significant untapped potential for buyers and
providers alike.

Market opportunity by verticals: There is a large market opportunity not only for established
industry verticals like Banking, Insurance and Manufacturing, but also for buyers and providers
in many other emerging verticals. The Banking & Capital Markets, Insurance9 and Manufacturing
verticals together constitute almost 70 percent (US$ 160-190 billion) of the total US$ 220-280
billion export market opportunity over the next five years. However, emerging verticals such as
Technology, Telecom and Travel & Transportation verticals also provide opportunities in excess
US$ 10 billion by 2012. Other verticals such as Media & Publishing, Pharmaceuticals & Life Sciences,
and Energy & Utilities too represent significant untapped opportunity.

Market opportunity by type of services: Another way to look at the total export market
opportunity is by type of services demanded vertical-specific BPO services10 and horizontal BPO
services.11 Over the next five years, vertical-specific BPO services provide larger market
opportunity (60 percent; US$ 145-175 billion) compared to horizontal BPO services. Horizontal BPO
services, which currently account for a greater share of services offshored to India, also provide a
significant addressable market opportunity a total of US$ 75-105 billion spread across
traditionally mature areas like CIS and F&A as well as emerging segments like HR, Knowledge
Services, and Procurement Services.
Market opportunity by nature of work: Buyers and providers need to expand their relationships
into middle-office and front-office services, which together represent an opportunity in excess of
US$ 100 billion by 2012. However, back-office processes are expected to remain the largest
opportunity areas over the next five years (providing more than 50 percent of the overall market
opportunity). Back-office opportunities extend beyond traditional SG&A (e.g., F&A, HR) functions;
services such as transaction processing activities in Banking and Capital Markets, investment
operations in Capital Markets, supply chain and logistics support for the Manufacturing, Retail, and
Travel industries are some examples of high-potential back-office services.
Market opportunity by source geography: There is significant BPO opportunity for buyers and
providers across geographic markets. While North America is expected to contribute
roughly 70 percent of the total market opportunity for the Indian BPO industry, both providers and
buyers should increasingly look at exploiting opportunities in the UK, Continental Europe and Asia
Pacific. English-language based business processes from these geographies represent a huge market
opportunity of US$ 45-75 billion by 2012. Furthermore, domestic Business Process Outsourcing
market (in verticals such as, Banking, Retail, Insurance, Media, Telecom, and Government) provides
an additional US$ 15-20 billion opportunity for the industry.
It is possible for Indian BPO providers to maximise the available market opportunity by developing
a stronger nearshore presence, strengthening language and cultural capabilities, and developing
distinctive value propositions.

Includes Life & Pension, Property & Casualty and Health

Refers to BPO services that require a high degree of vertical-specific knowledge
11
Refers to BPO services that are reasonably similar across verticals
9

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Considerations for future growth

Efforts being undertaken by the Indian BPO industry will enable it to grow rapidly in the future.
Continuing on current growth momentum could help the Indian BPO industry reach about US$ 30
billion in export revenues by 2012. However, comparing past growth trends with the significant future
market opportunity, the Indian BPO industry can set itself a stretch target of US$ 50 billion (that is,
approximately five times its present size) in export revenues by 2012. A fivefold growth in the Indian
BPO market will add nearly 2.5 percent directly to Indias GDP from exports earnings and provide direct
employment to about 2 million people. This will also spur growth in smaller Tier - 2/3 cities to enable
the sixfold growth in the number of delivery centers that will be required to support the stretch target
for the industry. Also, it is important to note that secondary impact of the Indian BPO industrys growth
on employment in related service industries and consumer spending is likely to be multiple times as
compared to the direct impact.
In order to capture a significant part of the available opportunity, various stakeholders will need
to manage multiple internal and external considerations: 1) supply-side constraints such as
talent and infrastructure, 2) emerging competition from other offshore destinations, 3) threat to
sustainability of Indian BPO industrys cost advantage and economic value proposition, and 4) evolving buyer
expectations that require up-shifting of providers value propositions. Further, fulfilling these
expectations will require providers to make specific choices and trade-offs in terms of capabilities and
investments.
The future growth of the Indian BPO industry will put significant constraints on the supply side.
From a people perspective, capturing a fivefold growth will put pressure on talent availability at all
levels. While the number of people required to support impending growth are available, unless the
current focus on ready-to-eat talent is altered, the future growth may lead to a shortage of 0.8-1.2
million entry-level graduates by 2012. This shortage may become further accentuated on account of
competition for resources from domestic industries such as Retail, Insurance, Telecom, and Banking, as
well as from additional requirements to support growth in domestic BPO business. Middle-management
personnel with domain experience, largely sourced from the domestic industry, will also be in short supply.
Sector-specific skill shortages (specialized skill categories for vertical-specific processes such as
actuaries for Insurance BPO) are also likely to emerge. Additionally, a significant part of the fresh,
entry-level pool is difficult to access, due to geographic distribution of employable talent. Tier - 2/3
cities in India will have to meet approximately 50 percent of the additional talent requirements.
This will necessitate creation of physical and social infrastructure in these cities, which needs to be
facilitated by various stakeholders.
While India is best equipped to capitalise on the available opportunities, these opportunities are not
lost to other offshore destinations. A number of offshore / nearshore BPO destinations are emerging
as viable options for BPO delivery centers (e.g., Philippines, Eastern Europe, Latin America, and China),

NASSCOM-EVEREST INDIA BPO STUDY

and could pose a threat to Indias continued dominance of the space. These locations also offer lower
cost than source geographies, provide sizeable pools of talent, and offer valuable leverage points to
buyers. Further, these competing destinations are continuing to reshape their fiscal and regulatory
incentive structures to attract buyers as well as providers of BPO services.
The economic model behind Indias BPO industry is constantly changing. Historically, providers
have been able to tap into relative wage differentials across geographies to build a strong value
proposition for offshoring. While cost-arbitrage continues to be a significant driver of global sourcing
for most buyers, the associated benefits will diminish over time with changes in underlying factors.
Adverse currency movements and wage inflation in India are putting pressure on operating margins of
providers. Compared to the US dollar, the Indian currency appreciated significantly since 2002 a trend
that is likely to continue in the near term and even in the medium to long-term. Inflationary pressures
on operating cost are unlikely to ease, due to resource scarcity and overall economic growth. Scenarios
on potential momentum indicate that cost-arbitrage can diminish in the medium-term. As a result,
reliance on a cost-savings-driven value proposition alone will not be in the best long-term interest of
the Indian BPO industry.
Given this environment, two broad priorities emerge for the industry: a) optimize the current
environment in order to continue the cost-arbitrage-led proposition, and b) innovate to continue
building new, higher-value propositions for buyers.
Evolving buyer expectations also drive the necessity to deliver additional value beyond labour arbitrage.
With increasing maturity, buyers are looking for impact beyond costs and efficiency. Mature buyers
are adopting optimization and transformation-focussed objectives. Evolving buyer expectations are
also reflected in buyers third-party vendor selection criteria in addition to cost- and quality-related
criteria, process expertise, industry expertise, and strategic impact today figure as key vendor selection
criteria for mature buyers. Similarly, captives are also facing growing expectations from their parent
companies, with more than 70 percent of parent companies expecting captive operations to deliver
value beyond cost savings.
Fulfilling these expectations will require that providers make specific choices and trade-offs in terms
of capabilities and investments. Providers will need to develop value-add approaches in terms of the
type of work (move from providing simple rules-based work to complex judgment-based work), type
of capability (develop standards and centers of excellence) and accountability for outcome (move from
ownership of task to ownership of process and business outcome). There is early evidence of providers
stepping-up to deliver such initiatives and value-add results to buyers.
Successful outcomes will be reflected in terms of broad adoption of future-state provider models
and changes in the way buyers pursue global sourcing opportunities. Increasingly, buyers will need to
approach global sourcing issues with a transformational mindset while deciding on a) sourcing models,

NASSCOM-EVEREST INDIA BPO STUDY

b) engagement and governance approaches with providers, and c) developing output-based pricing /
performance metrics.
As providers step up, arbitrage-centric, sub-scale operations will come under pressure. Most players will
need to invest in highly specialized offerings or diversify to build scale. Industry dynamics suggest four
kinds of end-state models for third-party vendors:
1.

Global leader - large integrated, full-service BPO player offering end-to-end service delivery
in multiple segments (across multiple key verticals and most horizontals). These vendors
will have global delivery capabilities including a fairly large onshore delivery presence and will
deliver true transformational services to large and mid-size buyers, and will act as value-adding
innovation partners.

2. BPO specialist - provide best-in-class BPO services for priority verticals and horizontals. These
vendors will have distinctive offerings based on domain expertise and superior transition
capabilities. They will service transformation-focused as well as optimization-focused buyers that
are willing to offshore core as well as non-core processes.
3. Diversified BPO player - provider of large number of undifferentiated BPO services for priority
verticals and horizontals. These vendors will provide end-to-end services for a small number of key
domains and be strategically opportunistic in service delivery across other domains.
4. Segment specialist - provide end-to-end services for 1-2 key domains (verticals or horizontals).
These vendors will develop as large specialized players with significant global expertise in select
domains and will service specific core skills not addressed by other providers.
Similarly, three potential end-state alternatives will emerge for captives, each requiring
appropriate operational trade-offs across capability building, metrics, organization structures, and decision-making processes:
1.

Global center of excellence - drive excellence / improvement theme(s) in global context, provide
end-to-end ownership of process and alignment with parent on business and strategic objectives.
These organizations will develop based on deep domain experience in high-value horizontal or
vertical processes and will increasingly create solutions for the parent company versus simply
delivering services.

2. Innovation incubator - drive innovation at a global company level and develop based on significant
investment in cutting-edge tools, technologies, and platforms.
3. Low-cost aggregator - develop as cost-competitive, scaled organization operating within internal
marketplace (combination of third-party vendors and other captive locations).

NASSCOM-EVEREST INDIA BPO STUDY

Key action themes for the future

Over the next five years, right choices by stakeholders of the Indian BPO industry could effect a
fivefold growth. There is, however, a need for concerted and collaborative action by various stakeholders to
create the enabling eco-system for future growth of the industry.
Efforts are required across eight action themes for the industry to realize its potential and to maintain
and accelerate its growth trajectory over the next five to ten years:
1. Protect Indias cost advantage to ensure that buyer interest, adoption and growth are sustained

Multiple levers can be used to protect Indian BPO industrys cost-advantage. As a first step,
providers need to diversify their delivery footprint within India through creative and innovative
operating models. Movement to low-cost Tier- 2/3 cities is attractive despite lower employability
and higher management overheads. Our analysis shows that providers can reduce total operating
costs by 20-30 percent by moving to a low-cost city within India. By doing this, the industry can
effectively tap labour pools in several states across India.

In addition, providers will need to increase focus on cost rationalization and revenue de-risking
initiatives. These could involve initiatives to 1) increase resource utilization, 2) manage wage cost
increases, 3) optimize internal SG&A expenses, and 4) de-risk revenue stream by diversifying the
client base and adopting currency hedging strategies.

The Government also needs to maintain support to the industry through appropriate incentives
and facilitate creation of infrastructure to ensure parity with other competing nations. These
incentives and support mechanisms could include fiscal incentives (e.g., continuation of the tax
benefits under the STPI scheme beyond 2009, stamp duty exemptions), infrastructure incentives
(e.g., build infrastructure capacity ahead of demand in Tier- 2/3 cities through incentives to direct
and indirect participants and increased public-private partnerships) or even changes to labour laws,
promotion of SMEs12, and removal of some key telecom-related restrictions.

2. Create BPO hubs with the enabling physical and social eco-system to drive BPO-led growth
broader and deeper within India

Government and industry will need to collaborate to facilitate creation of BPO hubs in Tier- 2/3
cities within India. Creation of BPO hubs is dependent on creation of an enabling eco-system
required to successfully operate in Tier- 2/3 cities. This eco-system should include elements of
physical (e.g., international connectivity, mass-transport system, telecom connectivity, power,
housing) as well as social (e.g., healthcare, education, shopping and entertainment, security,
hotels) infrastructure. Further, there may be an opportunity to shape the creation of infrastructure in
a way that it is based on skill availability and the domestic industry footprint within each BPO hub.

Small and medium enterprises

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3. Increase employability and access untapped talent pools by creating greater linkages between the
current education system and the needs of the BPO industry, and facilitating the development of
BPO-specific education models

Initiatives related to education are required to expand the employable talent pool in India. The
industry needs to work more aggressively with the Government to create greater linkage between
the current education system and requirements of the BPO industry. This can be done by 1) policy
changes like liberalization of higher education, 2) increased collaboration between industry and
academic institutions to take up initiatives such as introduction of BPO-specific curriculum and
improving students access to funds for higher studies, 3) introducing coursework changes and
teacher training at the school level in accordance with future requirements of the BPO industry. There is also a significant opportunity for private players to step in and create a BPO education industry. Such a move should be based on creating longer-term training programs to improve communication and other skills required by the BPO industry. Specific training programs
need to be developed to create several intermediate levels of skills and specialization (between
generalists and highly trained specialists), and to bring alternate talent pools (e.g., highschool
graduates, educated housewives) into the BPO workforce.

4. Encourage the growth of domestic BPO market to enhance the competitiveness of Indian
industry, create additional employment, and facilitate development

In order to facilitate growth of the domestic BPO market, specific regulatory barriers (e.g., cap
on domestic operations that can be handled from an existing center used for export businesses)
need to be removed. In addition, the value proposition of domestic BPO needs to be crystallised
and communicated to the buyer community to enable widespread adoption. To be successful in
the domestic market, providers will need to develop an end-to-end value proposition and adopt
innovative delivery strategies.

5. Up-shift the third-party and captive value proposition to effectively deliver against changing
buyer expectations

Providers will need to step up to fulfill evolving buyer expectations regarding optimization and
transformational value creation. Our extensive interaction with buyers indicates that one of the
key initiatives required would be providers engaging with buyers early in the decision-making
process. Providers need to become a part of the decision-making process by developing
consulting capabilities, creating strategic account-management capabilities, and tailoring their value
proposition based on buyer maturity and requirements. Providers will also need to create an
improved value-added approach by investing in people, process, and technology-related initiatives.
The final aspect of up-shifting the value proposition would be for buyers and providers to create
win-win economics by adopting pricing metrics related to process output or business drivers and
linking them to business performance metrics. Such a move will incentivize providers to develop
into value adding partners.

NASSCOM-EVEREST INDIA BPO STUDY

6. Shape an integrator role for the Indian BPO industry in the emerging global services
supply chain

As large, mature buyer organizations push offshoring lever harder, a global services supply
chain is emerging. There are many examples of multi-location global sourcing networks created
through use of captives and third-party vendors. While India is often the nerve center of such
networks, other offshore locations offer unique advantages that may not be replicable in India
(e.g., Philippines has superior English language and soft skills for customer service operations
especially for US buyers, Eastern Europe offers language and time-zone advantages for
European buyers). The Indian BPO industry, therefore, needs to aggressively take on a more
proactive and shaping role in the global sourcing space. Providers need to continue to expand their
delivery network to other low-cost geographies to take advantage of the leverage points offered
by these destinations and expand their service delivery footprint onshore to take end-to-end
ownership of service delivery. Providers could also identify opportunities to create alliances
(mergers, acquisitions, subcontracting) with overseas players to develop compelling propositions for
buyers. The industry should collaborate and develop alliances with industry bodies in other
competing destinations in order to create an enabling environment for acquiring specialized skills
from other emerging locations (e.g., European language skills from providers in Eastern Europe).

7. Communicate the true performance and potential of the industry to a broader set of stakeholders,
including buyers, employees and Government

The Indian BPO industry needs to clearly communicate its value proposition to buyers, current
and potential employees, influencers, and Government. Specific outreach programs need to be
implemented to increase interaction with buyers in order to highlight the growing maturity of
service offerings and provide perspectives on perceptions regarding political, economic and social
risks. The industry should also partner actively with media to facilitate greater and more balanced
communication to the external world through proactive coverage of achievements and potential of
the BPO industry. Current and future employees, as well as influencers such as parents of young
graduates, form a very critical group of stakeholders for the BPO industry. Individual providers as
well as the industry need to promote the attractiveness of BPO as a career option by highlighting
exceptional firm-level initiatives for employee development and facilitating information-exchange
forums / mass outreach programs at various colleges.

8. Help buyers embrace the overall opportunity of Indias BPO industry in a more meaningful way

Buyer organizations will need to re-orient their global sourcing decision-making process in order
to tap the significant opportunity presented by the Indian BPO industry. They need to adopt a
more holistic view of global sourcing opportunities, engage a larger internal stakeholder group, and
develop a comprehensive global sourcing plan along with an enabling organization model.
In addition, buyers also need to develop sourcing and engagement models with providers that
foster integration, optimization and innovation.

NASSCOM-EVEREST INDIA BPO STUDY

The traditional notion of what Business Process Offshoring could deliver for buyers is gradually
giving way to a transformation-driven outlook. These changes present significant opportunities for
the Indian BPO industry but, at the same time, also necessitate conscious decision-making by all
stakeholders. We believe that the eight key action themes outlined in this report will enable the Indian
BPO industry to ride the next wave of growth. However, effective implementation will require continuous
collaboration between key stakeholders in the industry, including the Government.

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